2. I purchase a 1-year 5 percent bond for $1000. a) What is the change in the in
ID: 1179178 • Letter: 2
Question
2. I purchase a 1-year 5 percent bond for $1000.
a) What is the change in the interest rate if I find that I would receive $1010 for an immediate resale?
b) What is the change in the interest rate if I find that I would receive only $995 for an immediate resale?
I purchase a 1-year 5 percent bond for $1000. What is the change in the interest rate if I find that I would receive $1010 for an immediate resale? What is the change in the interest rate if I find that I would receive only $995 for an immediate resale?Explanation / Answer
a ) If interest rate decrease immidiately after the purchase of bond the present value of bond will rise and bond can be sold at higher prices.
In case the interest rate decreases by 1.05% that is interest rate becomes 3.95% then the Bond can be sold at $1010.
b ) In same way, if the interest rate increases immidiately after purchasing the bond te present value of bond will decrease and the bond will fetch lower prices in the market.
In case if interest rate decreases by 0.5% that is interest rate becomes 5.5% then the bond will fetch $995 in the market
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